AM Best maintains its stable outlook on the UK non-life insurance business, noting that despite elevated geopolitical risks, headwinds and tailwinds affecting the operating environment for the business remain broadly balanced.
The ratings agency said continued minimal economic growth and rising unemployment through 2026 mean insurers may face lower demand for discretionary insurance products and increased price sensitivity, putting pressure on margins.
On a more positive note, inflation continues to move closer to the Bank of England’s 2% target rate. AM Best believes this could benefit the UK non-life insurance sector if claims inflation falls accordingly.
However, ongoing geopolitical tensions, particularly in the Middle East, are adding to uncertainty in global markets, which could lead to economic disruption.
Personal insurance (mainly home and car insurance) remains one of the most competitive market segments in the UK, with demand highly driven by price. Even in strong underwriting years, many players’ underwriting results are close to break-even, with overall profitability often relying on investment income and ancillary services.
Although vehicle pricing improved in 2024, lower interest rates throughout 2025 due to competitive pressures largely eroded these gains. Figures from the Association of British Insurers (ABI) show car insurance premiums have fallen for the third consecutive quarter, although growth slowed towards the end of the year.
Meanwhile, claims inflation persists due to expensive technology in new cars and the spread of electric vehicles. As a result, AM Best expects margins to tighten further in 2026. While insurers may seek to maintain pricing discipline, any positive pricing momentum may be short-lived in such a competitive and price-driven market.
Home insurance is the second largest non-life insurance category in the UK retail sector, accounting for around a quarter of underwritten business.
Market conditions are soft in 2025, with ABI reporting a 4% year-over-year decline in average home insurance premiums in the fourth quarter, further reducing inflation-adjusted rates. At the same time, average claim costs rose 15% from 2024 to another record high.
Although overall inflation has eased, high material costs and labor shortages continue to push up repair costs, while rising weather-related losses are pushing up average claim costs.
With claims costs appearing structurally higher, continued declines in premiums through 2026 could threaten margins, suggesting a challenging outlook for home insurers. AM Best expects disciplined underwriting and prudent catastrophe risk management to play a key role in achieving and sustaining profitability.
AM Best highlighted that UK commercial insurance margins fell in Q4’25, marking the eighth consecutive quarter of decline. Casualty insurance has basically remained stable, while property insurance, cyber insurance and financial insurance have been the weakest, affected by competition in insurance capabilities and improvements in reinsurance conditions.
The ratings agency also observed margin pressure from brokers seeking higher commissions or marketing placements through broker facilities, which could drive up acquisition costs.
As pricing pressure continues into 2026, AM Best expects underwriting margins to compress, which may prompt insurers to respond more strategically. These may include portfolio optimization and enhanced risk assessment insights to maintain underwriting discipline, but may also extend to other areas such as improving operational efficiencies through automation or even M&A.
AM Best senior financial analyst Dale Kirby said: “UK insurers’ overall profitability will benefit significantly from the high interest rate environment from 2022, as low-duration fixed income portfolios turn to higher reinvestment yields. AM Best expects investment income from these portfolios, which dominate the market portfolio, to remain strong in 2026, mitigating the impact of softening interest rate conditions on the underwriting side and providing a stable income stream.”
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